In the software subscription and SaaS business, there is a common revenue standard of Annual Recurring Revenue or ARR. It is a deceptive measurement because it sounds so simple, ARR = MRR x 12. Easy right? Well not if you don’t understand the actions your sales teams need to take to avoid the dreaded “churn.” When my company was transitioning to ARR from bookings, it took about 6 months of constant education for everyone to grasp the basics of how ARR is calculated and feel comfortable reviewing their deals. The one item that continued to trip up sales reps is the rule that you need to co-term or you will churn. Why? ARR is just math and it has no knowledge of what you told the customer. A customer with a current contract that expires in 6 months, comes to you because they want to buy more and renew at the same time, is your dream customer! If you aren’t careful though, you can end up with churn when the current contract expires. The process to avoid this is to either cancel the current contract and spin up a whole new one, giving a prorated credit; or take the renewal you have now, and use different start dates for the lines to create the renewal order. Your CPQ system needs to have this functionality to give your sales teams the best chance of doing it right.
Here is an illustration of how not to do it:
When this occurred, a sales manager would end up at my desk to explain how this is incorrect because they “wrapped everything up” in the 2nd contract. What happened is that the account got an artificial bump in ARR for 6 months due to the failure to co-term properly. Do you know how to co-term to avoid ARR churn? Contact us to review your systems and training processes and proactively mitigate churn.
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